When you expect the share price to go down, you can sell it at that moment and later buy it back at a lower price. Thus you get some profit. This is normal selling.
In the equity segment, short-selling means selling those shares which have not been delivered into your account. In this case, you "borrow" shares from your brokers pool and sell it. When the price goes down, you buy it back with profit and return the shares to your brokers pool. See below illustration:
- A share of scrip ABC is trading at Rs. 100 at 10:15 AM. You expect the price to reach down Rs. 90 by closing. But you do not have any delivery of it in your account.
- So you borrow some(assuming 10) shares from your broker's pool and sell it @ 100. So your account is now credited with 100 x 10 = 1,000.
- At closing, price reaches Rs. 90. So you must buy those at Rs. 90. Thus, your account will be now debited by Rs. 90 x 10 = 900.
- The 10 shares which you bought just now are then returned to the broker from whom you borrowed. And there is a profit of Rs. 100 profit in your account.
Risk of short selling in equity cash segment:
In the cash segment, it is compulsory that before the end of the session, you
must return all the borrowed shares to your broker's pool. So you must buy the shares back, no matter what price they are trading at. So incase it goes up, instead of down, then you may have to buy back the shares at higher price - resulting in loss. Thus buying back of shorted shares is called as
square-up. If you forget to square-up, the shares are sold in an "auction" later and you will be penalized. I am not sure of the day on which it is auctioned and the penalty metrics. Consult your broker for this.
If you are interested in short-selling, you can try Futures as there is no delivery. But since you are newbie, I suggest you stay away from F&O and try to first survive in the equity segment.
How much shares can you borrow to short-sell:
This depends upon your account balance. Ex: Lets assume your balance is Rs. 5000/- and you want to short-sell a share that is currently trading at Rs. 100. Then, max. no of shares you can borrow is 5000/1000 = 50.
What if you want to borrow more than in proportion with your account balance?
The broker provides "add-on" money called as
leverage. I think its the same as margin. I am not very clear about this as I stay away from using leveraged money, but I think the rate of interest charged over leveraged money is excruciating high! So do not use leverage until you are sure of a profitable trade. Leveraged losing trades alone are responsible for destroying account balances of many novice traders.
I would suggest you stay away from leverages. margin, until you become competent enough to earn great profits.
